Powell Zooms the Hill

Today, we had the word from on high as part of the normal, period economic report from Fed Chairman Powell to the Senate Banking Committee. While most of it was couched in the typical hesitation and measured tone, there were some interesting nuggets thrown out to astute observers.

Before we dig in with my own assessment, here are some references if you want to play along at home:

Monetary Policy Report (PDF from Senate Website)

Recorded Testimony (COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS website)

The Chairman repeated several times that inflation is upon us. In questioning, he asserted that the period calculation is set to adjust shortly to reflect the pandemic period and he expects the windowed rate to rise. He also expects the mid-term rate to rise as well. However, he was careful not to give a prediction of either long term rates or the degree to which they would rise.
The current rate of deficit spending sits at $6.5 trillion with an additional $1.9 trillion in the pipeline. When asked, the Chairman did not see it as an immediate problem; however, as he did explain that to mitigate its risk in the longer term, future spending would have to be right-sized to alleviate negative impacts.
In a discussion of crypto and its potential for adoption, Chairman Powell was consistent with earlier statements. He stated that the Fed is not in a hurry to adopt it for reserve purposes and wants to see how other international adoption efforts pan out. The status of the dollar as a reserve currency throughout the world informs his decision and he is very cautious. He additionally stated that he didn’t see much use for international monetary transactions and with the quality and development of consumer-level transaction processing, he didn’t find much use for it on the retail level.
Both parties (R’s and D’s) used the time to push the Chairman on his feelings about their respective social prerogatives. As expected, he was politically savvy and evasive on lending any specific support.

As could be seen by the charts and indices, the markets were less than enthusiastic. Although, as I write this, the DOW, S&P, and NASDAQ have recovered to positive territory for the day.

I personally believe the Chairman is understating the inflationary risk. He continues to base many statements on data of movements from the 2008–2009 recessionary period. He also tends to move back to recent data points and trends for many assumptions.

As I am not a Fed Chairman and am just a dude sitting in his office playing armchair quarterback, take it with a grain of salt. However, there is no denying our current circumstances are not the same as 2008. The pandemic-related economic crisis has a completely different fact pattern and impact. Even the level of economic stimulus is dramatically larger than anything envisioned during that period.

If there’s anything we can learn it’s that there is a non-linear impact when discussing economies of scale. We are dealing with a government debt load over 10 times larger than previously seen and an economy shattered on a number of levels. There are different variables at play.

We also have to understand that our current economic situation is artificial. Given stimulus and various moratoria on consumer debt remediation (i.e., the mortgage and rent forbearance, unemployment stimulus, and Covid-related goodwill) we have not faced the full impact of economic pain. These are variables that cannot be denied and lie firmly within the political and social realms outside the control of the federal reserve.

I will drop this link here: The Futures Market as Forecasting Tool: An Imperfect Crystal Ball (St. Louis Fed)

I have maintained a close eye on the movements of durable commodities as well as the short term flow of perishables. The price actions we have seen on all critical categories do not indicate good future tidings. Read past just the article title and things make sense.

I’m not saying the Chairman is wrong, but I do think he’s sugarcoating it.

The levels of debt we currently maintain coupled with the natural tendency of our Congress to forget the meaning of the word restraint poses a problem. History is littered with failed nations and crisis brought about by uncontrolled spending. Having been too old to go through new math, I’m not seeing the response equaling the problem posed. We’re eventually going to have to pay the piper.

Finally, I’m not in disagreement with his crypto assessment.

I’ve never been accused of being bullish on the long term prospects of crypto as it currently stands. It’s a solution still trying to find a real problem. For many of the reasons discussed, I don’t see a mass, widespread government adoption.

For further reading: A solution good for almost nothing

The fed’s report on the status of our economy is always fun and informative. It provided about as many answers as expected and accomplished what it set out to do. From the Senate, the House will also have their own hearing, which should be just as fun, if not more considering the general tone of that body.

The best part of the hearing is watching Senators grapple with the nuance of technology in a remote setting. I do miss the formality of the in-person hearings, but zoom calls have their own quaint humor.